Security Conglomerates are DyingAuthor: John Honovich, Published on Dec 11, 2012
If you want to pretend to be a financial expert in security, just pontificate about the impending wave of acquisitions and nod knowingly about the wave of consolidations poised to sweep the industry. Repeat this year after year to build your credibility among the security illuminati.
This will work perfectly except that it is completely wrong and fails to come through every year, leaving these 'experts' promising next year will finally be it.
The reality is the opposite is happening, with conglomerates losing more power each year. Equally importantly, this trend will most certainly continue over the next decade.
Instead of seeing a rash of acquisitions, we are much more likely to see more break ups like Tyco/ADT and the recent surprise Ingersol Rand multi-billion security spin-out.
Nonetheless, we do project greater aggregation of power within the historically fragmented industry, however, driven by growing independent specialists at the expense of declining conglomerates.
Historically, the case for security conglomerates was grounded in two theories:
- The large brand and channel infrastructure of the conglomerate enabled much greater reach, higher revenues and efficiencies in selling across the globe.
- The larger size of conglomerates reduced general and administrative costs as they could be pooled across broader, bigger organizations.
Product quality and innovation were always secondary concerns. So long as products were average, the greater brand and organizational power of the conglomerate would allow it to succeed. Plus, the conglomerate could go out and buy small innovative companies to periodically refresh its product portfolio.
However, for the last 5 years, acquisitions have been miserable. Looking at them, the pattern is clearly small struggling companies getting acquired for pennies on the dollar, with many in the weak video analytic and PSIM segments.
Equally importantly, look at who has not been acquired. None of the top tier VMS nor IP camera companies have been acquired - not Milestone, not Genetec, not Exacq, not Avigilon, not Axis, not Mobotix, not Arecont, etc., etc.
Why Acquisitions Have Been So Weak
The security conglomerates track record shows they are focused on buying companies cheaply (relative to the target's revenue) and not spend much overall (typically $50 million USD or less).
Unfortunately for the conglomerates, the successful new entrants have zoomed past those levels and typically want valuations in the $200+ million range. The conglomerates either cannot or will not pay yet they are unable to stop the incursions into their markets as the new entrants continue to steal significant share away from incumbents.
Conglomerates Are Not Needed
Once upon a time, a conglomerate could successfully argue that new entrants with novel technology needed the big company to get the product to market and ramp up sales.
The hard truth is that the last 5 years have proved that this is no longer the case. All of the top growing IP video entrants are past $50 million revenue and a few passed $100 million, without the help of a conglomerate. Plus, most of the new entrants are profitable and have access to robust private investment options, so do not need the conglomerate to be a 'bank'.
The only time the conglomerate is truly needed is for security startups that are going to fail. In these cases, the conglomerate gets a cheap price for an essentially defective product, which further hurts their competitive positioning.
Driving Force - the Internet
The Internet makes it radically cheaper for new entrants to get their name out and communicate with prospects across the world. The physical infrastructure of the traditional channel - legions of sales reps to push the word out literally door to door - is far less critical. Sales is still vital but the Internet is a force multiplier that allows one or a few sales people at a new entrant to be extremely more powerful than they could have been just a decade ago.
Products Becoming More Powerful
In the past, people could rightfully argue that, when it came to financial success, product performance / power was secondary to brand and channel. Today, that is not the case. The top companies in IP video are overwhelmingly companies that offer the most value (whether because they are the best overall products - like an Axis or a Genetec - or they offer the best overall price/performance - like an Arecont or Avigilon). This is not an accident but a shift in how companies market and how users are able to find products. This puts security conglomerate in more and more trouble.
We expect specialist companies who drive innovation, whether in quality or low cost, to continue to take market share at the expense of conglomerates. We do not see any solution for the conglomerates to fight back. They are largely incapable of beating them on quality, nor buying them at the premiums they can demand. While some acquisitions will always occur, the days of conglomerates buying out major innovators and reaping great rewards are drawing fast to a close. Instead, look for more conglomerate break ups as they attempt to be agiler and product focused to compete in this new world.
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